11 August 2016
As part of its contribution to international climate change, the Scottish Government is committed to achieving 80% reduction in Scotland’s emissions by 2050. To this end, Section 63 of the Climate Change (Scotland) Act 2009 provides for regulations to be made for: (1) the assessment of the energy performance of existing non-domestic buildings and greenhouse gas emissions from such buildings; and (2) building owners to take steps to improve the energy performance of, and reduce emissions from, such buildings.
Those regulations are now with us in the form of the Assessment of Non-Domestic Building (Scotland) Regulations 2016 (the “Regulations”). The Regulations come into force on 1st September 2016 and therefore owners of non-domestic properties should now be considering what they need to do, if anything, to be ready for that date.
The Regulations require the improvement measures recommended by the advisor to be able to pay back the initial costs of implementing the improvements through reduced energy consumption within 7 years (in the opinion of the advisor). Boiler replacement recommendations should only be proposed if the boiler is older than 15 years.
The Regulations require the owners of large non-domestic buildings or building units (i.e. a part of a non-domestic building which is designed or altered to be used separately) to assess and set out actions to improve the emissions and energy performance of their properties where it is offered for sale or for rental to a new tenant. The owner must then either improve the property within a specified period or report annually to the public Scottish EPC Register (the “Register”) on its actual energy use, until such time as they have completed the improvements.
The obligations under the Regulations are triggered upon the sale or lease of non-domestic buildings or building units (parts of buildings designed or altered to be used separately) with a floor area over 1,000 m².
Buildings built to the 2002 or more recent building standards and buildings improved to meet more recent energy standards are exempt from the Regulations, as are workshops and non-residential agricultural buildings with low energy demand. Temporary buildings which are to be used for no more than 2 years and buildings already improved via a Government Green Deal funding mechanism are also exempt.
The Regulations similarly do not apply to:-
the renewal of an existing lease with the same tenant;
the grant of a short term lease for no more than 16 weeks (which does not include an option or right to extend); or
the sale or lease of a building before the construction of the building is completed.
The Regulations build upon the already established process for the production of an Energy Performance Certificate (“EPC”) and require owners of non-domestic property to make an Action Plan available free of charge to prospective buyers or tenants. This means that in reality the owner must make sure that the data relating to the Action Plan is sent to the Register prior to marketing the property. When the property is sold or let, a copy of the action plan must be delivered free of charge at completion of the transaction.
Action plans will be issued by registered section 63 advisors following an assessment of the property and consideration of the current EPC for the property. This builds on the EPC assessor role and, as with EPCs, valid action plans can only be prepared by persons registered through a Scottish Approved Organisation. The advisor will identify improvement measures to be carried out and, if any are identified, the measures will be set out in the Action Plan. If there are no identified improvements then the Action Plan will state this also.
The improvement measures shall consist of one or more of the 7 identified building improvement measures set out in the Regulation (which include upgrading lighting and heating controls, installing roof insulation and replacing boilers etc). They can also consist of alternative improvement measures advised by the section 63 advisor.
The Regulations require the improvement measures recommended by the advisor to be able to pay back the initial costs of implementing the improvements through reduced energy consumption within 7 years (in the opinion of the advisor). Boiler replacement recommendations should only be proposed if the boiler is older that 15 years.
If the Action Plan states that operational rating measures are to be implemented in respect of the property the owner has a decision to make:-
Carryout the improvement measures recommended; or
Defer the improvements by arranging to report the energy rating of the property to the Register via a Display Energy Certificate (a “DEC”) prepared by a qualified DEC assessor annually.
Option 2. recognises that improvement works are perhaps not practical in the short term and allows the owner to defer and undertake the works at a later date. While there is no restriction on how long the works can be deferred for, the policy behind the Regulations very much intend that the improvement works will be carried out at some point.
Building improvement measures: - Opting to carryout physical improvements locks building owners into a 42 month (3.5 year) time table for completion of the works. The improvements must be completed within this timeframe to avoid penalty. The period is based upon six months to obtain statutory permissions and three years to complete works, which also ties in with the duration of a building warrant.
Reporting (which will be marked on the Action Plan as implementation of operational rating measures): - Where the reporting route is chosen the owner must make the choice to defer the works within 12 months of the date of the Action Plan. This provides flexibility which will be important where the ownership of a building changes or where access to improve, or the decision on who will ultimately be undertaking the improvements (landlord or tenant), may have to be negotiated with a tenant.
Following production of the initial DEC, failure to lodge a DEC within the required annual reporting period:
within 42 months of the date of the first Action Plan - will mean that the option to report will be lost and the improvements must be completed within that 42 month period to avoid enforcement action.
more than 42 months after the date of the first Action Plan - will attract enforcement action unless improvement works are also completed.
The duty to improve is discharged once the improvement measures set out in the Action Plan are completed and the new performance of the building recorded. This is a two step process whereby 1) a new EPC is produced and lodged with the Register to report the estimated improved performance and 2) a new Action Plan is produced and lodged with the Register. This new Action Plan will show the date the improvement measures were completed and the new EPC reference number but will otherwise be identical to the original Action Plan.
Local authorities are responsible for enforcing the Regulations and have the power to issue fines of £1000 for failure to produce an Action Plan and failure to implement building improvement works within the 42 month time frame.
Lease:- The parties to a lease will be free to decide the extent to which Action Plan improvement measures are to be paid for or carried out by the tenant (although the Regulations do provide that the initial Action Plan must be provided to the prospective tenant (or in the case of a sale, purchaser) “free of charge”). The Landlord should also bear in mind that the ultimate responsibility for compliance with the Regulation rests with them as owner, regardless of what contractual arrangement is made with the Tenant.
Sale:- Although there is no requirement for the improvement measures to be implemented before the property can be sold, it is very much open to negotiation as to whether or not the improvements are undertaken before or after the date of entry and at the cost of the seller or the purchaser.
Following sale, any outstanding Action Plan will transfer to the new owner who can commission their own Action Plan if they do not wish to undertake the measures set out in the seller’s plan. If the new action plan does not provide for implementation of operational rating measures (i.e. Reporting), the improvement measures set out in the revised Action Plan must be completed by the same deadline as that in the original Action Plan for the building.
The worry is that the Regulations impose additional (and for some owners rather expensive) costs on owners of non-domestic buildings or building units which in turn may hinder their ability to bring their property to market for sale or let.
The Regulations do not impose a duty to implement the improvement measures prior to marketing the property, which for some property owners will be a great relief, however they will inevitably increase negotiation time with prospective purchasers and tenants (and perhaps in turn increase agents and solicitors fees).
There is also the cost of obtaining an EPC, an Action Plan, annual DEC’s (if the reporting route is chosen) and, when works are finally implemented, an updated Action Plan and DEC to take into account.
The government suggests that the improvement measures that will be required under an Action Plan will be relatively modest and should encourage building owners to improve and benefit from lower energy consumption. This may be true to an extent as the Regulations do require that improvement measures must (in the opinion of the section 63 advisor) be able to pay back the initial cost through reduced energy consumption within 7 years or in the case of boiler replacements, that the boiler is more than 15 years old. However for some property owners this pay back period may not be quick enough.
If you have an enquiry or require advice in relation to the above please contact Stephanie Zak or another member of our Commercial team.